CB1 Capital CIO on Harvest Heath & Recreation Inc (CNSX:HARV) Becoming Largest MSO
CB1 Capital Management CIO Todd Harrison breaks down the latest news in the cannabis space. Harrison isn’t surprised that Jefferies downgraded Tilray Inc (NASDAQ:TLRY) (FRA:2HQ), as it has not made the same strides as its peers. He discusses mid-tier names like OrganiGram Holdings Inc (CVE:OGI) (OTCMKTS:OGRMF) (FRA:0OG) and Village Farms International Inc (TSE:VFF) (NASDAQ:VFF) (FRA:02V) that have performed well in recent weeks. Harrison is please that CB1 Capital’s portfolio includes Harvest Health & Recreation Inc (CNSX:HARV) (OTCMKTS:HRVSF). Harvest recently announced the acquisition of Verano Holdings, LLC, becoming the largest MSO in the United States in the process. Harrison suggests the deal is the latest example of the FANGification of the cannabis space. He’s watching new listing CB2 Insights (CNSX:CBII) with interest and likes its ability to generate revenue.
James West: Todd Harrison with CB1 Capital. Todd, how are you today?
Todd Harrison: Hey James.
James West: What’s going on down there?
Todd Harrison: Not too much, it’s Monday, the sun’s out, so you got that going for us. Markets are up; that’s good, too.
James West: Yeah, well, actually the weather’s risen above zero and the wind has stopped howling, so, you know, I’m going to stick around, maybe go outside, even.
Todd, what’s going on in US capital cannabis markets? I think the main thing that has kind of given everybody pause here is Owen Bennett Jefferies’ downgrading of his Tilray outlook, and he’s basing that on what?
Todd Harrison: Well, I mean, listen: Tilray, you’ve spoken about it plenty on your show. I mean, it’s a little, it’s out of place versus some of the other comparables that are trading in much better multiples, in our view, and we’ve talked about it, I think, for the last year, whether that’s CannTrust or Organigram, both of which we own; Village Farms, even though that’s getting a little nosebleed up here. You know, those are our Canadian plays; you know, Tilray’s just never really done it for us.
But the bigger news, I think, today, is the Harvest Health and Recreation takeover of Verano, creating the biggest US multi-state operator, at least for today. So that, I think, is what’s putting the focus on US operators.
James West: Huh. Okay, so give me the rundown on that. We haven’t even looked at that today, because we’ve been messing around in our YouTube studio in Toronto. Say that again: Harvest Cannabis took over who?
Todd Harrison: Harvest Health and Recreation, HARV is the ticker, they took over Verano, which was a privately held MSO, and now they have evidently the largest footprint in the US, overtaking, I believe, it was Acreage. But all moving parts, in our opinion, the sort of implication of US cannabis, we think, out of all of these will emerge the four or five winners: the Facebook, Amazon, Netflix, Googles, of the cannabis cycle for US players.
James West: Wow, great. So are you a buyer or holder of HARV or Verano?
Todd Harrison: We own Harvest; it’s been one of our larger holdings. Certainly, you know, we like to trade around our core positions; we had sold a little bit into the run-up at the beginning of the year, very fortuitously bought some back last week, and you know, maintaining our percentage weighting. But again, we look at these, as we saw often, three-to-five-year lens. So with a three to five year lens, you know, we’re trying to make sure that we maintain our core so we navigate our way to the other side of what we foresee to be asymmetric opportunities for US cannabis.
James West: Sure. The proliferation of the CBD opportunity continues unabated here, especially in the US, with the passage of the legislation recently making that Federally permissible. It strikes me, Todd, that some of the CBD operations that are suddenly coming to market where, you know, they’re making some pretty big claims about being the biggest and ultimately the most profitable – it strikes me that the CBD market is going to be one of the first ones that’s ripe for oversupply here, especially in the US. What’s your take on that?
Todd Harrison: I don’t know about continuing unabated; the Department of Healths across the United States has made this very onerous for CBD brands for particularly anybody that wants to use it as an ingredient in food or beverages. Paradoxically, that should benefit the existing players: Charlotte’s, Elixinol, TGIF, all of which we have positions. As you know, we advise 1933 Industries, TGIF.
But certainly, you know, we think that the best days are ahead of these names, and it’s going to be tough to buy mobile CBD brands. I mean, it’s going to be everywhere, but to your point, you can’t really make claims, I don’t even know if you’re allowed to call it CBD as opposed to full-spectrum hemp oil; and certainly, distribution is going to play a role there. But still very early innings, you know? We talk to a lot of people, and most of the people we speak with just don’t see sort of the value proposition for cannabis writ large.
James West: Interesting. Todd, a lot of companies are sort of starting to position to spread to the US in Canada, or rather to Europe in Canada. And the perception is, you know, whereas three months ago the perception in Canada was, okay, the Canadian market is far more mature than the US market, so let’s all go and grab multi-state operators. Now, the multi-state operator sort of model is a saturated playground; arguably, arguably, now I know you’re going to disagree with me there!
So there’s, at least in the Canadian investment space, it’s kind of like people are saying, well, okay: So the US place is a crowded playground now with a lot of US operators. It’s going to be harder to compete there – let’s go to Europe.
And so I mean, I think it’s all about gravitating towards the lowest-hanging fruit. Do you see that Europe is becoming more attractive relative to US operators at all? Or do you still see the US multi-state operator as the ultimate playground for new money coming into the space?
Todd Harrison: I don’t think you can be, there’s any question. I think Beacon, our friends at Beacon Securities, said last week in one of their notes that US multi-state operators are trading at a 69 percent discount to their comparable Canadian peers. So I don’t know where this crowded sandbox or whatever the analogy was; we think that the MSOs certainly provide the best risk/reward, if for no other reason, you think of the optionality that’s going to be introduced when banking reform comes through. That alone gives you a pretty wide margin of error, in my opinion, on some of these multiples.
And again, I was speaking with a reporter earlier who was making the valuation case on the MSOs versus last year’s numbers, and that just doesn’t make sense to us. We’re looking at 2019, 2020 even, in terms of what we see as relatively inexpensive ways to play this space, as much as I can say that with a straight face, given sort of what the numbers are right now.
But it’s going to take time, and I think that’s sort of the opportunity, again, if you’re looking with a three to five-year lens. But you know, we certainly don’t think that, you know…first of all, you’ve got the United Nations vote coming up that all indications are, they’re going to push the re-classification of cannabis out to March 2020, which sort of aligns with the US election, right? But the World Health Organization has already recommended a rescheduling; as you know, they certainly sealed that, and by sealing it, I think gave them the cover to push this out one more year.
But nonetheless, that’s sort of the paradox for a lot of these international plays, and certainly puts the focus back on the US opportunities, at least for us.
James West: Interesting. What about the states that aren’t really making moves towards legalization of cannabis, you know, like, I’ll call them the, let’s call them the Bible Belt for want of a better word. I mean, states that seem to, you know, be resisting the trend. Do you think that they’re ultimately going to have to jump on the bandwagon and, you know, move the entire US market more and more towards a national sort of legality?
Todd Harrison: I mean, listen, I don’t think these genies are going back in the bottle – and particularly since we continue to learn more and more about, as we call it, the efficacious adjoining of cannabis. And this is not just a one-off for anxiety or for stress or for anger or anxiety or stress or for any of the maladies that sort of are being tossed around for cannabis right now, but certainly as we get into the clinical trials and start to understand more about how some of these compounds are reacting in indication such as cancer, brain cancer in particular, autism, Alzheimer’s, and such, I think that perception is going to take several years to kind of turn, I think, maybe sooner; but as people come to realize that cannabis is not about getting high, it’s about getting well, and a lot of these cannabinoids are actually very therapeutic and good for you, that’s an offside societally.
So I think all of the states are going to come. Some might come sooner, some might come later, but they’re all going to come, because this, in our opinion, is going to morph into, rough justice, a $1 trillion-plus industry in a good decade’s time.
James West: Okay, great. Do you have any new companies that are on your radar that maybe the rest of us haven’t heard about?
Todd Harrison: Um, you know, we have three to five year horizons on a lot of our names, so you know, the same names that we have been talking about for some time are the next GW Pharmaceuticals, and obviously names like Village, as I stressed a play out of the marketplace, Village Farms. You know, we’re pretty constant in our names.
A new name that we recently added that we think is interesting is CBII Insights. That’s CBII on the Canadian exchange, and I’m certainly not going to make the case for the stock here, but you know, we bought some recently, and it’s probably worth doing some due diligence on. Real company, real revenues, just a new listing.
James West: Yeah. You bet. I’ve noticed that there’s an increasing number, so CBII, you know, started off as an investment company that was deploying capital into some of the names that it liked that it gravitated towards, and then it became an operator, which, you know, that’s kind of the path that was followed by MedMen, by Acreage Farms, by a whole bunch of companies. Is that business model still a viable one in your view, in terms of newcomers to the market? Or do you think that’s a crowded sandbox?
Todd Harrison: Well, I think as with anything, it’s a function of who the operators are and what the strategy is. You know, this is a greenfield for a new industry, and certainly there’s going to be generational wealth, in our opinion. But most of the companies out there are probably going to fail. There’s probably an analog to Y2K, the dot com bubble and bust. We don’t know who the Friendster’s are versus the Facebooks versus the MySpaces, and if you don’t know who Friendster or MySpace is, that’s sort of the point; we all know who Facebook is, right?
So all of that has to be proven through, and like I said, most of the companies out there are likely to fail, but the ones that survive are just going to see all kinds of benefits, both for the company and for the investors in those companies.
James West: You bet. All right, that’s great, Todd. Thanks again for your input. We’ll come back to you soon. Have a great day.
Todd Harrison: Thank you, James.
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